Inflation: What Is It and Inflation in the USA

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Inflation is an increase in the general price level of goods, works, and services of the country’s population and businesses or an extended period. In this process, for the same amount of money after a certain time, it will be likely to buy fewer goods and services than earlier. In this case, it can be said that the purchasing power of money has decreased over the past time (Rudd, 2021). Therefore, money has depreciated; that is, it has lost some of its actual value. Inflation should be distinguished from price hikes because it is a long-term, sustained process (Mackevičius et al., 2018). Inflation does not mean an increase in all prices in the economy because the costs of individual goods and services can go up, down, or remain unchanged. It is crucial that the overall price level in the country changes.

With moderate inflation, prices rise no more than 10% a year. The value of money is preserved, contracts are signed at nominal prices. This kind of inflation is considered the best because it occurs due to the renewal of the range (Durguti et al., 2021). It allows for price adjustments due to changes in supply and demand conditions. In addition, in this form, this economic phenomenon is manageable. In October, for example, inflation will rise to 4.1% on an annualized basis throughout the euro area, compared to 3.4% in September (Eurostat, 2021). However, despite the sharp rise in inflation, the European Central Bank is not ready to cancel the stimulus measures adopted in connection with the recession caused by the pandemic (Eurostat, 2021). Higher food prices are the most visible manifestation of inflation for Europeans, which they can easily trace. It should be borne in mind that there is always the danger of moderate inflation turning into more dangerous types of inflation, so it must be kept under control.

There is a price increase from 10-20 to 50-200% per year with galloping inflation. Currency depreciation in galloping inflation is more rapid than in moderate inflation and less abrupt than in hyperinflation. The main negative feature of galloping inflation is the high risks when entering into contracts with nominal prices. That is why in case of their conclusion, it is necessary to consider the supposed growth of prices or make calculations in another, more stable currency.

From 1917 to 1927, the national income of the United States increased nearly threefold. Conveyor production was mastered, the stock market boomed, speculation grew, and real estate became more expensive. Due to the increase in production, additional money had to be emitted accordingly, and a critical circumstance to consider was that the dollar was then indexed to gold. Before the Great Depression, U.S. gold reserves did not grow as rapidly as the economy (Hetzel, 2017). This circumstance led to hidden inflation, as the government printed new money against a booming economy (Hetzel, 2017). This undermined the dollar’s security in gold, the budget deficit grew, and the Federal Reserve reduced the discount rate (Hetzel, 2017). A situation has arisen where the productivity growth in the industry has decreased. At the same time, the amount of pseudo-money has increased, which characterizes galloping inflation.

Hyperinflation causes prices to rise over 50% per month and over 100% per year. The welfare of the population deteriorates sharply, economic relations between enterprises are destroyed (St. Onge, 2017). Such inflation is uncontrollable and requires emergency measures on the part of the state (St. Onge, 2017). As a result of this process, production stops, sales of goods, products, works, and services decrease. Moreover, the actual volume of national production decreases, unemployment grows, existing enterprises close, the bankruptcy of companies occurs. In this situation, the most likely prognosis is a complete collapse of the monetary and commodity system and the transition to a natural exchange.

The first national currency collapse occurred in America during the War of Independence in 1775-1783. The second burst of hyperinflation occurred in 1861 because the Confederate States of America issued huge amounts of extra banknotes to finance the fight against the North (Inflation Data, 2019). Holders of such money were subsequently required to replace them with government bonds. During this period, the term inflation first began to be used in relation to money circulation when a considerable mass of greenbacks was issued.

Inflation can have both positive and negative effects on social and economic processes. For example, inflation has a stimulating impact on trade turnover, as the expectation of rising prices in the future encourages consumers to buy goods today. In addition, under conditions of inflationary development of the economy, weak enterprises go bankrupt. Thus, only the strongest and most efficient companies remain in the national economy. However, the problems of money emission and the depreciation of securities are also aggravated. Inflation can cause a decrease in the volume of goods produced domestically and a decrease in the value of the national currency. There are numerous examples of different types of inflation in history, and every country in the world, not just the United States, has faced this phenomenon. Knowledge of economic laws allows leaders to predict and prevent inflation in a country.

References

Durguti, E., Tmava, Q., Demiri-Kunoviku, F., & Krasniqi, E. (2021) Panel estimating effects of macroeconomic determinants on inflation: Evidence of Western Balkan.Cogent Economics & Finance, 9(1), 1-13. Web.

Eurostat. (2021). Annual inflation up to 4.1% in the euro area.Web.

Hetzel, R. L. (2017. The evolution of U. S. monetary policy. Federal Reserve Bank of Richmond. Web.

Inflation Data. (2019). Confederate Inflation Rates (1861 – 1865). Web.

Mackevičius, J., Šneidere, R., & Tamulevičienė, D. (2018). The waves of enterprises bankruptcy and the factors that determine them: the case of Latvia and Lithuania.Entrepreneurship and Sustainability Issues, Entrepreneurship and Sustainability Center, 6(1), 100-114. Web.

Rudd, J. B. (2021). Why do we think that inflation expectations matter for inflation?Finance and Economics Discussion Series, 62, 1-25. Web.

St. Onge, P. (2017). How paper money led to the Mongol conquest: Money and the collapse of Song China.The Independent Review, 22(2), 223–243. Web.

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Inflation: What Is It and Inflation in the USA

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